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Monday Morning Quarterback: Picking Out the Bad Apples


Kozlowski and Ebbers and Lay? Oh my, they're the very definition of bad apples you never want to find in your kid's trick-or-treat bag.

Red and white, blue suede shoes
I'm Uncle Sam, how do you do?
Gimme five, I'm still alive
Ain't no luck, I learned to duck

(Grateful Dead)

Good morning and welcome back to the Halloween snack. After tricks and treats and misses and beats throughout last week's five-session span, we ready ourselves for a fresh stretch of sugarcoated reality. With bulletproof costumes in tow, the bulls danced merrily through the news, skipping over cavities like kids without a care. This week, as they chew through more news, they'll likely brush a bit closer to the root of the canal.

We know that the reaction to news is more important than the news itself. As such, we respect that Hoofy turned a blind eye to Merrill Lynch's (MER) multi-billion dollar "Oops, I did it again," virtually assuring that Stanley O'Neal will dress as Britney Spears during this week's masquerade party.

OK, bad visual. But it's not just Stan. Or Chuck Prince, the artist that will formerly be known as the CEO of Citigroup (C). Or even Warren Specter, the once respected president of Bear Stearns (BSC), who will likely dress up as a well-heeled hedge fund manager in the not-to-distant near future.

This isn't so much about them as it is about the system and process. For we've seen these scary movies before, modern day thrillers that didn't end when the lights turned on. These stories just scratch the surface of skeleton infested closets that currently litter hundreds of hallowed halls across Wall Street.

We've spoken at length about the nature of theses dancing bones. We saw similar horror stories manifest when the tech bubble burst and corporate malfeasance morphed into a modern-day witch-hunt. And that's not to say that there weren't ghouls and goblins. Kozlowski and Ebbers and Lay? Oh my, they're the very definition of bad apples you never want to find in your kid's trick-or-treat bag.

The truly scary part of these modern day remakes is that the actors aren't necessarily to blame. It is the story itself-the twisted tale of misguided greed and commonality-that made it seem normal and natural to take part in the process. Yes, the buck stops with the boss-as CEO of my own firm, I take full responsibility for every action of each employee on any day. But this isn't a story of one man or woman, it's endemic of an entire industry and, dare I say, society.

The off-balance sheet conduits, the "SIV's," the sub-prime mortgages, the collateralized debt obligations, the incessant desire to package and repackage risk and capturing the disconnect between what people know and what Wall Street can charge for advice has been going on forever. We spoke at this a few years ago but it fell on deaf ears. Now, as everyone seems to be listening, the story should be told as unhappy campers sit around the campfire.

CEO's are not without blame. And even the best in breed, from Jamie Dimon at JP Morgan to John Mack at Morgan Stanley (MS), have made their share of missteps. The issue here, however, isn't so much manpower as it is structural integrity. These imbalances, interdependencies, hidden risks, counter-party collateral and embedded insecurities won't disappear as the corner office is cleared. In fact, one could argue that the inherent learning curve will allow for these issues to manifest as a function of that leaning curve.

Last week, we witnessed back-to-back upside Snappers that saved the tape from the abyss followed by a snazzy rally on Friday as whispers of "can't get 'em down" made the rounds and Microsoft saved the day. You can't blame the bears for being frustrating and, regardless of why the tape turned on the late-day dime, the onus is on us to respect (but not defer to) the price action.

We enter this week with both eyes cast towards Wednesday with three things in mind. First, it's the FOMC meeting, which the bulls have been leaning on for quite some time. Second, it's mutual fund year-end, so any pumping or purging of winners and sinners will likely abate or, perhaps, reverse. And thirdly, it's Halloween, and that will serve as tangible manifestation of the fun and games that we've now come to expect each session.

Trick or treat, my friends-and be wary of the bad apples.

Random Thoughts

  • On Friday's close, the DJIA and S&P retraced exactly 50% of the losses from the October top.

  • The S&P "double top" is in the last tangible technical backstop for the bears. Keep that in mind-they are!

  • What happens when the specter of an imminent rate cut is no longer a viable catalyst?

  • That thought continues to percolate behind my crowded eyes.The action in the drillers in the face of spiking crude was THE tell that slippage was imminent in the complex a few week's prior. Please note that we saw similar action in the space on Friday. (see article: )

  • Minyan Peter passed along a note over the weekend from Merrill Lynch's Rich Bernstein that looks at the dollar through another lens. The gist is that the leaky greenback may be contributing as much-if not more-to the lift in commodities as global growth. By his pen, the CRB, which is up 9.9% in dollar terms, is 3% lower when measured in Euros, up .8% through the lens of the British Pound, 1.7% higher in Swiss Francs and ahead by 5.8% against the yen. This supports the long-held "asset class deflation vs. dollar devaluation" lens that we've been highlighting in the 'Ville and arrives at the same conclusion. If the dollar begins to rally, equities-along with other "stuff," such as commodities, will be vulnerable.

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